Financial serv services ices
comprises various functions and services services that are provided by financial institutions in a financial system.
includes asset management companies and liability management companies.
helps not only in raising the required funds but also in ensuring efficient distribution.
are provided by S.E, specialized and general financial financial institutions, institutions, banks and insurance companies.
are regulated by SEBI, SEBI, RBI, Dept. of Banking and Insurance, and Govt. of India.
help in deployment deployment of funds raised raised , assist in decision making making in regard to financial mix etc.
Contributes towards towards the growth growth and development through mobilization of savings and channelizing them into productive investments.
Cons tituent tituents s of financial serv services ic es Financial services market – c o n s t i t u e n t s w h o r e n d e r s er er v i c e s . en t s F o u r m a j o r c o n s t i t u en
1. Market players: host of institutions institutions and agencies, like like banks, fin.Inst, MFds, MB, stock brokers, consultants, c onsultants, underwriters, etc. 2. Financial instruments: imp part part of the financial services. Equity, debt, hybrid and exotic instruments. 3. Specialized institutions: institutions: includes acceptance houses, discount discount houses, factors, depositories, credit rating agencies, VC Inst. 4. Regulatory bodies: Fin mkt mkt is regulated by a host of institutions institutions and agencies, like, Dept. of Banking & Insurance of the Govt., RBI, SEBI, BIFR.
1
Example of financial services
1. Leasing, credit cards, factoring, portfolio management, technical technical and economic consultancy, credit information. 2. Underwriting, discounting and rediscounting of bills, 3. Acceptances, brokerage and stockholding stockholding 4. Depository, housing finance finance and book building, 5. Hire purchase and installment credit 6. Deposit insurance 7. Financial and performance guarantees 8. E-commerce and securitization of debts 9. Loan syndicating and credit rating
Grow th of financial services in India India
Discussed under the various stages
1. Merchant Banking Era (1960 onwards) fin.services like MB, Insurance, Leasing services began to grow. 2. Investment Companies Era: (1970 onwards) includes establishment of variety of investment institutions and banks. Like, UTI, UTI, MFds, LIC, Nationalization Nationalization of major commercial banks. 3.Modern Services Era: (1980 onwards) launch of a variety of financial products and a nd services like OTCEI, MF, Factoring, VC, and credit rating. 4.Depository Era: (1990 onwards) depositories were set up, promoting paperless trading through dematerialization of securities. Book Building, NSE and computerization of BSE. 2
Example of financial services
1. Leasing, credit cards, factoring, portfolio management, technical technical and economic consultancy, credit information. 2. Underwriting, discounting and rediscounting of bills, 3. Acceptances, brokerage and stockholding stockholding 4. Depository, housing finance finance and book building, 5. Hire purchase and installment credit 6. Deposit insurance 7. Financial and performance guarantees 8. E-commerce and securitization of debts 9. Loan syndicating and credit rating
Grow th of financial services in India India
Discussed under the various stages
1. Merchant Banking Era (1960 onwards) fin.services like MB, Insurance, Leasing services began to grow. 2. Investment Companies Era: (1970 onwards) includes establishment of variety of investment institutions and banks. Like, UTI, UTI, MFds, LIC, Nationalization Nationalization of major commercial banks. 3.Modern Services Era: (1980 onwards) launch of a variety of financial products and a nd services like OTCEI, MF, Factoring, VC, and credit rating. 4.Depository Era: (1990 onwards) depositories were set up, promoting paperless trading through dematerialization of securities. Book Building, NSE and computerization of BSE. 2
5.Legislative Era: (1995 onwards) FERA replaced by FEMA, Amendments in Co. Act 1956,
R eg e g u l a t o r y f r am am e w o r k
Broad classification of the regulatory framework relating to financial service sector in India is as:
1. Institutional regulations: regulations: also known as structural regulations regulations which call for a clear demarcation of activities a ctivities of Financial institutions. It is to promote healthy competition among players. Apex agencies like SEBI to regulate the MB, Stock Stock Broking Co. and RBI another structural entity prescribing the activities of commercial banking. 2. Prudential regulations: related to internal management of financial institutions and other financial services org, regarding capital adequacy, liquidity and solvency etc. Aims at preventing preventing the entry of firms without adequate resources. (ex. Minimum net worth requirement for various financial service firms is fixed by the SEBI and RBI`s regulations relating to the NBFC`s) 3. Investors regulations: the role of SEBI is highlighted with with periodic guidelines on investor protection. 4. Legislative Regulations: brought out out by Govt. for all round development of financial services industry. They are, Banking Regulation Act, Securities Contract Regulation Act, meant for evolving rules, guidelines and regulations that govern the micro aspect and operational issues. 5. Self-regulations: this is addition to the above regulations that are self imposed regulations such as, Foreign Exchange Dealers association, and Merchant Bankers association in addition to SEBI regulation that governs their members.
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The framewo rk of regulations cu rrently operating in India India is elaborated
banking and financial services
insurance services
investment services
Merchant Banking and Financial Services
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Reserve Bank of India Reserve Bank of India
Seal of RBI
The RBI headquarters in Mumbai
Headquarter Mumbai, Maharashtra s 18°56′00″N 72°50′10″E / 18.93337°N Coordinates 72.836201°ECoordinates: 18°56′00″N72°50′10″E / 18.9333 7°N 72.836201°E Established 1 April 1935 Governor Duvvuri Subbarao Central bank India of Currency Indian Rupee ISO INR 4217Code US$300.21 billion (2010 Reserves [Key_rates:8.50% bank_rate=6.00% repo_rate=8.25 Base deposit rate reverse_repo_rete=7.25 SLR CRR Website
=24% =6%
rbi.org.in 5
The Reserve Bank of India (RBI, Hindi: भारतीय रजव ै ब क) is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010) of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. Reserve Bank of India plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union. Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks History 1935—1950
The old RBI Building in Mumbai The central bank was founded in 1935 to respond to economic troubles after the first world war. The Reserve Bank of India was set up on the recommendations of the Hilton-Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for another nine years. The Preamble of the Reserve Bank of India 6
describes the basic functions of the Reserve Bank as to regulate the issue of bank notes, to keep reserves with a view to securing monetary stability in India and generally to operate the currency and credit system in the best interests of the country. The Central Office of the Reserve Bank was initially established in Kolkata, Bengal, but was permanently moved to Mumbai in 1937. The Reserve Bank continued to act as the central bank for Myanmar till Japanese occupation of Burma and later up to April 1947, though Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though originally set up as a shareholders‘ bank, the RBI has been fully owned by the government of India since its nationalization in 1949. 1950—1960 Between 1950 and 1960, the Indian government developed a centrally planned economic policy and focused on the agricultural sector. The administration nationalized commercial banksand established, based on the Banking Companies Act, 1949 (later called Banking Regulation Act) a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans. As per Saying on mr. Rishi Kumar k 1960—1969 As a result of bank crashes, the reserve bank was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan Developing Banking. The Government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector. 1969—1985 Between 1969 and 1980, the Indian government nationalized 6 more commercial banks, following 14 major commercial banks being nationalized in 1969(As mentioned in RBI website). The regulation of the economy and especially the financial sector was reinforced by the Government of India in the 1970s and 1980s.The central bank became 7
the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits. The measures aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies. The branch was forced to establish two new offices in the country for every newly established office in a town [ The oil crises in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects. 1985—1991 A lot of committees analysed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Indian financial market was a leading example for so-called "financial repression" (Mackinnon and Shaw). The Discount and Finance House of India began its operations on the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalisation.\ 1991—2000 The national economy came down in July 1991 and the Indian rupee was devalued. The currency lost 18% relative to the US dollar, and the Narsimahmam Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-libera l. The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets.This first phase was a success and the central government forced a diversity liberalisation to diversify owner structures in 1998. The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital 8
market to reinforce their capital base. The central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Limited—in February 1995 to produce banknotes. Since 2000 The Foreign Exchange Management Act from 1999 came into force in June 2000. It should improve the foreign exchange market, international investments in India and transactions. The RBI promoted the development of the financial market in the last years, allowed online banking in 2001 and established a new payment system in 2004 - 2005 (National Electronic Fund Transfer). The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.[ The national economy's growth rate came down to 5.8% in the last quarter of 2008 - 2009 and the central bank promotes the economic development. Structure Central Board of Directors The Central Board of Directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, four deputy governors, four directors to represent the regional boards, and ten other directors from various fields. Governors The central bank till now was governed by 21 governors. The 22nd, Current Governor of Reserve Bank of India is Dr Subbarao Supportive bodies The Reserve Bank of India has four regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and serve - beside the advice of the Central Board of Directors - as a forum for regional banks and to deal with delegated tasks from the central board. The institution has 22 regional offices. The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has 9
four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems. The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S S Tarapore to "lay the road map" to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 1999-2000. On 1 July 2006, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India constituted a new department — Customer Service Department (CSD). Offices and branches The Reserve Bank of India has 4 regional offices,15 branches and 5 sub-offices. It has 22 branch offices at most state capitals and at a few major cities in India. Few of them are located in Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has suboffices at Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla a nd Srinagar. The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training Centres at Belapur ,Chennai, Kolkata and New Delhi. Main functions
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Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture depicting "Prosperity through agriculture".[25]
The RBI Regional Office in Delhi.
The regional offices of GPO (in white) and RBI (in sandstone) at Dalhousie Square, Kolkata. Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and 11
the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system. Monetary authority The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s. The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins. Manager of exchange control The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Issuer of currency The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to 12
utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves. Minimum Reserve System - Principle of Currency Note Issue RBI can issue currency notes as much as the country requires, provided it has to make a security deposit of Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores must be FOREX Reserves. This principle of currency notes issue is known as the 'Minimum Reserve System'. Developmental role The central bank has to perform a wide range of promotional functions to support national objectives and industries. The RBI faces a lot of intersectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector. Related functions The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition. The institution maintains banking accounts of all scheduled banks, too. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above. Policy rates and Reserve ratios Policy rates, Reserve ratios, lending, and deposit rates as of 14 September, 2011 Bank Rate
6.0%
Repo Rate
8.25%
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Reverse Repo Rate
7.25%
Cash Reserve Ratio (CRR)
6.0%
Statutory Liquidity Ratio (SLR)
24.0%
Base Rate Reserve Bank Rate Deposit Rate
9.50% –10.75% 4% 8.50% –9.50%
Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet depositor‘s demands and reserve
requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 5 May, 2011 the bank rate was 6%. Cash Reserve Ratio (CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 6%. Statutory Liquidity Ratio (SLR): Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary
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impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities. In well-developed economies, central banks use open market operations--buying and selling of eligible securities by central bank in the money market--to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years. Generally RBI uses three kinds of selective credit controls: 1. Minimum margins for lending against specific securities. 2. Ceiling on the amounts of credit for certain purposes. 3. Discriminatory rate of interest charged on certain types of advances. Direct credit controls in India are of three types: 1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set. 2. Banks are mandatorily required to keep 24% of their deposits in the form of government securities. 3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.
Establishment
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 . The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. Preamble 15
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Central Board
The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
Appointed/nominated for a period of four years Constitution: o
Official Directors
o
Full-time : Governor and not more than four Deputy Governors
Non-Official Directors
Nominated by Government: ten Directors from various fields and one government Official Others: four Directors - one each from four local boards
Functions : General superintendence and direction of the Bank's affairs Local Boards
One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi Membership: consist of five members each appointed by the Central Government for a term of four years
Functions : To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time. Financial Supervision
The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in 16
November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India. Objective
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. Constitution
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the ViceChairman of the Board. BFS meetings
The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments. BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members. The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues. Functions
Some of the initiatives taken by BFS include: i. ii. iii. iv.
restructuring of the system of bank inspections introduction of off-site surveillance, strengthening of the role of statutory auditors and strengthening of the internal defences of supervised institutions.
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The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions. Current Focus
supervision of financial institutions consolidated accounting legal issues in bank frauds divergence in assessments of non-performing assets and supervisory rating model for banks.
Legal Framework Umbrella Acts
Reserve Bank of India Act, 1934 : governs the Reserve Bank
functions Banking Regulation Act, 1949: governs the financial sector
Acts governing specific functions
Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market Securities Contract (Regulation) Act, 1956: Regulates government securities market Indian Coinage Act, 1906:Governs currency and coins Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market "Payment and Settlement Systems Act, 2007 : Provides for regulation and supervision of payment systems in India"
Acts governing Banking Operations
Companies Act, 1956:Governs banks as companies Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881
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Acts governing Individual Institutions
State Bank of India Act, 1954 The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 National Bank for Agriculture and Rural Development Act National Housing Bank Act Deposit Insurance and Credit Guarantee Corporation Act
Main Functions Monetary Authority:
Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
Developmental role
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Performs a wide range of promotional functions to support national objectives.
Related Functions
Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.
Offices
Has 22 regional offices, most of them in state capitals.
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Securities and Exchange Board of India Act, 1992
Securities and Exchange Board of India
औ
SEBI Bhavan, Mumbai headquarters
Agency overview
Formed
Jurisdiction
Headquarters
Employees
Agency executive
12 April 1992
Government of India
Mumbai, Maharashtra
525 (2009)
[1]
Upendr Kumar Sinha, Chairman
21
The Securities and Exchange Board of India Act, 1992 (the SEBI Act) was amended in the years 1995, 1999 and 2002 to meet the requirements of changing needs of the securities market and responding to the development in the securities market. Based on the Report of Joint Parliamentary Committee (JPC) dated December 2, 2002 , the SEBI Act was amended to address certain shortcomings in its provisions. The mission of SEBI is to make India as one of the best securities market of the world and SEBI as one of the most respected regulator in the world. SEBI also endeavors to achieve the standards of IOSCO/FSAP. In this background, the internal group constituted by SEBI consisting of its senior officers had proposed certain amendments to the SEBI Act. The SEBI Board had constituted an Expert Group under the Chairmanship of Mr Justice M. H .Kania (Former Chief Justice of India) to consider the proposals. The report of the Expert Group is placed for eliciting public comments on the recommendations. It may be noted that the Report does not necessarily reflect the views of SEBI on the various proposals and recommendations. SEBI would consider the comments received from various sources before taking any final view on the recommendations. How SEBI came into picture The World Bank and the International Monetary Fund (IMF) have introduced a benchmark i.e., Financial Services Assessment Programme (FSAP) to strengthen the monitoring of financial systems in the context of the IMF‘s bilateral surveillance and the World Bank‘s financial sector development work. The FSAP is designed to help countries enhance their resilience to crisis and cross-border contagion, and to foster growth by promoting financial system soundness and financial sector diversity. The mission of SEBI is to make India as one of the best securities market of the world and SEBI as one of the most respected regulator in the world. SEBI endeavors to achieve the standards of IOSCO/FSAP. Amendments will be required to be made in the Securities Laws especially the SEBI Act, which will facilitate India and SEBI to achieve above objective. Why do we need a regulatory body for Investor protection in India? 22
India is an ` informationally ' weak market
Boosting capital market demands restoring the confidence of lay investors who have been beaten down by repeated scams
Progressively softening interest rates and an under performing economy have eroded investment options, and require enhanced investing skills.
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992.
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992.
PREAMBLE
The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as
“…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”
Constitution of the Group It is in this background, the SEBI Board had decided to constitute an Expert Group to identify the deficiencies / inconsistencies in the existing provisions of the SEBI Act and also to suggest new provisions that can be incorporated in the SEBI Act to make it more effective and investor 23
friendly, taking into account recommendations of the JPC as also recommendations of other expert groups constituted by SEBI from time to time in this regard. The SEBI Board in its meeting held on August 5, 2004 constituted the Expert Group with the following members: 1. Mr. Justice M. H. Kania, ( Former Chief Justice of India) Chairman 2. Mr. Justice A. N. Mody ( Retd.) 3. Mr. Justice S. M. Jhunjhunwala (Retd.) 4. Ms. P. M. Umerji, Principal Secretary (Retd.) (Legislation),Govt. of Maharashtra 5. Shri. Jitesh Khosla*, Joint Secretary, Representative of the Department of Company Affairs(Govt. of India) 6. Shri. Prashant Saran , Chief General Manager, Representative of the Reserve Bank of India 7. Ms Parimala Rao, Principal, Govt. Law College, Mumbai 8. Shri. PGR Prasad, Managing Director,SBI Funds Management Pvt. Ltd., Representative of the Association of Mutual Funds of India(AMFI) 9. Shri. N. K. Jain**, Secretary and Chief Executive Officer, the Institute of Company Secretaries of India (ICSI), Representative of ICSI 10. Shri. Sushil Jiwrajka, Chairman,Western Regional Council , Federation of Indian Chambers and Commerce of Industry(FICCI) Representative of FICCI 11. Shri. K.R. Chandratre, Practicing Company Secretary & ExPresident Institute of Company Secretaries of India 12. Anil Singhvi, Director, Gujarat Ambuja Cements Ltd. 13. Shri. Pratip Kar, Executive Director , SEBI 14. Shri. R. S. Loona, (Member Secretary), sebi Missio n of SEBI
Securities & Exchange Board of India (SEBI) formed under the
SEBI Act, 1992 with the prime objective of
Protecting the interests of investors in securities,
Promoting the development of, and 24
Regulating, the securities market and for matters connected therewith or incidental thereto.‘
Focus b eing the greater investor p rotection , SEBI has becom e a v i g i l an t w a t c h d o g
The Propose and Aims Of SEBI
1. Regulating the business in stock markets and other securities markets. 2. Registering and regulating the working of stock brokers and other intermediaries associated with securities market. 3. Registering and regulating the working of collective investment schemes including mutual funds. 4. Promoting and regulating the self-regulating organizations
Deliberation and Examination by the Expert Group A paper containing few suggestions to amend the SEBI Act was prepared as a base material for discussion and deliberation by the Group. The said paper was sent to the representatives of all stakeholders and market participants inviting their comments thereon and further suggestions regarding amendments in the SEBI Act. The names of the stakeholders from whom the comments were sought are given in the annexure ‗A‘ hereto. The Group received detailed comments to the proposals from certain stakeholders whose names are given in the annexure ‗B‘ hereto. The Group deliberated on the
proposals made regarding amendments to SEBI Act in the light of comments thereon received from the stakeholders in its various meetings held on October 27, 2004, December 20, 2004, February 4, 2005, March 10, 2005, April 11, 2005, May 3, 2005, June 14, 2005 and on June 15, 2005 . After deliberating on the said proposals and comments of stakeholders, the Group seeks to make recommendations in respect of the following proposals:- I Proposed Amendments for incorporating new provisions in the SEBI Act. II Proposed Amendments 25
for changes in the existing provisions III Consequential and related amendments in other Acts. '''PART ONE'''
Proposed Amendments for incorporating new provisions in the SEBI Act 1.1 Investor Protection Fund
SEBI has been created inter alia for the purpose of protecting the interests of investors in securities. The investor education is more relevant in the context of complexities involved in various options and instruments of investments available in the securities market. Retail investors are not in a position to identify and /or appreciate the risk factors associated with certain scrips or schemes. With the result they are not able to make informed investment decisions. Since development of securities market largely depends upon proper education of investors, SEBI is committed to spread awareness amongst them. The Joint Parliamentary Report (JPC) on securities scam of 2001 had recommended that in order to enable SEBI to undertake investor education and awareness campaign effectively, the investor education and protection fund established under section 205C of the Companies Act and investor education resources of RBI should be shifted to SEBI and a joint campaign for investor education and awareness under the leadership of SEBI must be undertaken. The Group noted that majority of the stakeholders have agreed for the setting up of a separate investor protection fund under the SEBI Act. It is also suggested by the stakeholders that the said fund should be utilized exclusively for the purpose of investor education, conducting awareness programme and for protecting the interest of investors. The Group also noted that the proposed Investor Protection Fund is for the purpose of achieving the objective of Investor Education and awareness. In terms of section 55A of the Companies Act, SEBI is required to administer the provisions of sections specified in section 55A in respect of issue of capital, transfer of securities and non payment of dividend in 26
case of listed companies and the companies which intend to get their securities listed on the stock exchange. Further, SEBI is required to protect the interest of investors and enforce redressal of grievances of investors by listed companies. In the light of the above provisions, the Group also discussed the proposition regarding payment of compensation to investors for the purpose of investor protection. In this regard, the Group also deliberated on the suggestion for setting up of a Fund on the lines of Fair Fund established under the Sarbanes Oxley Act, 2002 of United States which is used for compensating the investors out of the penalties received. Another view was expressed during deliberations that the investors in the equity market invest in risk capital and no assured return or compensation for non fulfilment of every expectation may be provided in the statute. However, compensation in respect of fraud or misrepresentations or misstatements by companies or intermediaries may be considered. Further the Group noted that the Pension Fund Regulatory and Development Authority, Ordinance, 2004 which mandated the Pension Fund Regulatory and Development Authority (PFRDA) to protect the interest of subscribers to the schemes of pension funds has permitted PFRDA to set up the Subscriber Education and Protection Fund. The said Ordinance also specifies the monies which should be credited to the said Subscriber Education and Protection Fund. The said Ordinance also provides that all sums realised by way of penalties by PFRDA under the Ordinance shall be credited to the Subscriber Education and Protection Fund. The Group felt that to achieve the objective of investor protection by investor education and investor awareness, a separate fund under the SEBI Act on the lines of Subscriber Education and Protection Fund under PFRDA Ordinance 2004 to be administered by SEBI may be set up and administered by SEBI for investor education and awareness. Further, the compensation to small investors in respect of fraud or misrepresentations or misstatements by companies or intermediaries may be considered as a matter of investor protection out of the said Investor Protection Fund. In this regard it is felt desirable that SEBI may specify guidelines and parameters for administration of the Investor Protection Fund the for the purpose of Investor Education and Awareness and payment of compensation to small investors. In this 27
regard, the guidelines issued by SEBI in respect of Investor Protection Fund of stock exchanges may be adopted with necessary changes. As regards the monies to be credited to the said Investor Protection Fund, the Group took into consideration the representation of the National Stock Exchange that the big stock exchanges are utilising the monies for the purpose suitably. The Group also noted that the monies lying with the IPF of small stock exchanges are not being utilised to the full satisfaction. It is considered that the monies lying unutilized for substantial period in the Investor Protection Fund of the stock exchanges should be transferred to the proposed Investor Protection Fund. The unclaimed dividend and interest lying with the mutual fund and Collective Investment Schemes or venture capital funds and the unclaimed monies or securities of the clients lying with the intermediaries for a period of 7 years should be used in a purposeful manner. Further, all sums realised by way of penalties imposed by the Adjudicating Officer under Chapter VIA of the SEBI Act, should be credited to the proposed Investor Protection Fund. Recommendation
The Group recommends that a separate Investor Protection Fund under the SEBI Act, on the lines of Subscriber Education and Protection Fund under PFRDA Ordinance 2004 may be established for the purpose of investor education and awareness and for compensation to the small investors in respect of fraud or misrepresentations or misstatements by companies or intermediaries. The said fund be administered by SEBI to protect the investors and take measures for investor education and awareness and for compensation to the small investors in accordance with the established guidelines or parameters specified by SEBI on the lines of the guidelines in respect of stock exchanges. There shall be credited to the said fund the following amounts, namely a)unclaimed dividend or interest under any mutual fund or Collective Investment Scheme (CIS) or venture capital fund scheme for more than 7 years; b) any unclaimed money or securities of a client lying with an intermediary in securities market for more than 7 years; c) monies lying 28
unutilised in the Investor Protection Funds of the stock exchanges; d) all sums realised by way of monetary penalty under Chapter VIA of SEBI Act. 1.2 Nomination Facility
The concept of nomination has been recognized under section 109 of the Companies Act, 1956, Section 45ZA of the Banking Regulation Act, 1949 and Section 39A of the UTI Act, 1963 (since repealed). Under the aforesaid provisions, nominee of a shareholder or debenture holder, depositor or unit holder is entitled to the rights in securities or money held by the deceased to the exclusion of all other persons, notwithstanding anything contained in any other law for the time being in force including the testamentary laws. However, SEBI Act does not contain any such provision of nomination facility for the unit holders of mutual funds and collective investment schemes. The Group noted that SEBI (Mutual Funds) Regulations, 1996 provide for nomination facility to the unit holders. The Group felt that the provision for nomination facility is investor friendly but such provision should exist in the parent Act and not in the Regulations. However, the Group is not in favour of giving any overriding effect as provided under section 109 of the Companies Act, 1956 wherein the nominee‘s rights can defeat the claim of a legal heir. Recommendation
In view of the above, the Group recommends for a suitable amendment in the SEBI Act for the incorporation of a provision to provide nomination facility to the unit holders of Mutual Funds and Collective Investment Schemes. 1.3 Advance Ruling
The Group was informed that SEBI receives a number of requests from various market participants for advance guidance on the interpretation of the provisions of SEBI Act and Regulations. As SEBI Act does not contain specific provisions like section 245B to section 245N of the Income Tax Act, 1961 authorising SEBI to give advance ruling, SEBI has evolved a system of giving interpretive letters/no action letters under the provisions of SEBI (Informal Guidance) Scheme, 2003. However, the guidance given under the scheme does not equate with the advance ruling under the Income Tax Act as it is not binding on SEBI Board. 29
The advance ruling system for the securities market would have the advantage of a market participant being able to obtain a binding ruling on the applicability of a particular provision of Securities Laws to a proposed transaction, before actually undertaking such transaction. The Group felt that the system of advance ruling is certainly better than that of informal guidance given under the said scheme as the advance ruling given by SEBI would be binding on its Board. The binding effect provides, not only more comfort for the market participants, it also provides better legal status to the whole mechanism. However, in view of the smooth and satisfactory functioning of the Informal Guidance Scheme in vogue, the Group felt that SEBI should analyse the option very carefully as the move of shifting from the scheme to advance ruling would require setting up of a separate department and infrastructure on the lines of Income Tax Act. Recommendations
The Group recommends that as legally the advance ruling is preferable the adoption of the same may be considered and the Informal Guidance Scheme may also continue. 1.4 Self Regulatory Organisation (SRO)
The Group noted that section 11(2) (d) of the SEBI Act provides for promoting and regulating SRO. SEBI Act, however does not have specific provision for empowering SRO to make bye-laws having statutory force for admission of members. Further, SEBI Act does not have provisions relating to supersession of governing boards of SROs by SEBI or restricting the voting right of members of SROs, notwithstanding anything contained in the Companies Act, 1956. Proposed amendments seek to confer such powers on SEBI. The Group noted that SEBI has already framed regulations, namely, SEBI (Self Regulatory Organisations) Regulations, 2004 under section 30 read with section 11(2)(d) of the SEBI Act for regulating the SROs, which require inter alia SROs to seek recognition from SEBI. The Regulations also empower the SRO‘s to make r ules and bye laws with the approval of SEBI. Regulation 23 of the Regulation governing SRO‘s,
provides for the power of SEBI to withdraw the recognition. In view of the said power, the Group felt that SEBI is already having the requisite power to require the SROs to regulate their activities in accordance with 30
the Regulations. Consequently, there may not be any need for the amendment of the SEBI Act. Recommendation
The Group recommends that there is no necessity of amending the SEBI Act as proposed. The Regulations framed by SEBI should suffice to address the concern of SEBI, as a regulator of SROs. 1.5 Rectification of errors in orders
The Group noted that there is no provision in the SEBI Act, which empowers SEBI to rectify the clerical or typographical errors apparent in its own orders. A view was also expressed that SEBI does not have powers to review its own orders even in cases when orders are passed ex parte. The Group observed that ―Review of orders‖ appears to give substantive
powers which are usually not available with Authorities having original jurisdiction. However, the Group felt that enabling SEBI to rectify clerical or typographical errors apparent on the face of its order on the lines of section 26 (2) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is desirabl ans fds Recommendation
An amendment should be made in the SEBI Act to enable SEBI to rectify clerical or typographical errors apparent on the face of its order, on the lines of section 26 (2) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.
1.6 Retrospective effect
The Group noted that the existing provisions of SEBI Act do not empower SEBI to frame the regulations with retrospective effect even for the limited purpose of giving relief to the market participants. The Group felt that SEBI may be empowered to make regulations with retrospective effect in respect of matters relating to charging of fees or procedural matters on the lines of the Income Tax Act for the limited purpose of giving relief and not for imposing new liabilities and obligations. According to the Group such a benevolent provision may
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remove undue hardship to market participants in certain cases and hence should be viewed with favour. Recommendation
The Group recommends that the SEBI Act may be amended on the lines of section 295(4) of the Income Tax Act, 1961 to empower SEBI to make regulations with retrospective effect in respect of matters relating to charging of fees or procedural matters for the limited purpose of giving relief and benefit and not for imposing new liabilities and obligations. 1.7 Overriding Effect
The Group discussed the suggestion to amend SEBI Act in order to provide overriding effect to SEBI Act over other laws in the matter of securities. In order to assess the need for such an amendment, the Group tried to identify those substantive provisions of the SEBI Act that deserve to be given an overriding effect. After due consideration, the Group felt that SEBI Act does not contain any such substantive provisions which deserve to be given an overriding effect. It also noted that where ever the substantive provisions deserved to be given an overriding effect, the SEBI Act has already done by non obstante clause. Recommendation
The Group recommends that SEBI Act may not be amended for giving an overriding effect to the SEBI Act over other laws. 1.8 Power to issue circulars
The Group examined the proposal to amend the provisions of SEBI Act for giving statutory power to SEBI to issue circulars and guidelines. The Group noted that SEBI has been issuing circulars and guidelines under section 11 of the SEBI Act. The Group felt that there is no legal infirmity in issuing circulars or guidelines under the existing provisions of section 11 which is the source of inherent powers of SEBI. Recommendation
The Group recommends that SEBI Act may not be amended for inserting a specific provision for the issuance of circular and guidelines as SEBI has inherent powers to do so under Section 11 of the SEBI Act.
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1.9 Transaction / Issue of securities to be treated void in certain circumstances
The Group was informed that in cases of fraudulent issue of securities, excess dematerialisation of securities etc. SEBI should be empowered to declare such transactions as void. For this purpose suitable provisions in the SEBI Act on the lines of section 9(3) & section 14 of the SCRA may be made to provide that such transaction, if they are in violation of any specified regulation, shall be void. The Group felt that such power should be performed by an independent body, preferably by the civil courts. Administrative bodies may not be conferred with such jurisdiction. Recommendation
SEBI Act should not be amended as proposed. Such power should preferably be left to be exercised by a civil court. 1.10 Winding up of intermediaries
The Group was informed that one of the principles of Securities Regulations as specified by IOSCO/FSAP is that there should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. The Group noted that there is no specific power conferred upon SEBI under SEBI Act for taking steps for winding up of an intermediary in case such intermediary goes bankrupt or the continuance of such intermediary is considered to be detrimental to the interest of investors or clients of such intermediary. The Group noted that Reserve Bank of India (RBI) has power to file winding up petitions against a Non Banking Finance Company under section 45 MC of RBI Act. The Group felt that SEBI should have similar power to file winding up petition under SEBI Act. The Group further observed that in case of winding up of such intermediary company, the claim of the clients of such intermediary should have priority over other claims or debts i.e. even over secured creditors and sovereigns authorities such as Income Tax. The Group in this regard noted that under Section 43A of Banking Regulation Act, 1949 there is a provision for the preferential payment to depositors in priority to all other debts from out of assets of the Banking Company. The Group felt that similar provisions should also be made in respect of 33
claims of clients of intermediary companies while empowering SEBI to file a winding up petition against an intermediary in case such intermediary goes bankrupt or the continuance of such intermediary is considered to be detrimental to the interest of investors or clients of such intermediary. Recommendation
The Group recommends that suitable provision in the SEBI Act may be made to enable SEBI to file winding up petition in respect of the intermediary companies on the lines of section 45MC of the Reserve Bank of India Act and section 43A of Banking Regulation Act. 1.11 Non attachment of assets of clients with intermediaries
The Group noted that one of the IOSCO principles for securities market regulations is that the regulatory system should enable the pool of investors‘ funds to be distinguished and segregated from the assets of other entities. Further, the investors should be protected from misleading, manipulative or fraudulent practices, including insider trading, front running or trading ahead of customers and the misuse of client assets. It was brought to the notice of the Group that by the Securities Laws (Amendment) Bill, 2003, a section 27B was proposed to be inserted in the Securities Contracts (Regulation) Act, to provide that an investor may entrust his money or securities to any intermediary who shall hold such money or securities in trust and shall deal with them as directed by the investors. Such monies and securities shall not be part of the assets of the intermediaries and no authority shall attach or seize such assets of investors. However, in the Securities Laws (Amendment) Act, 2005 this provision was omitted. The Group observed that the money or securities entrusted by an investor to an intermediary should be held by such intermediary in trust of such investors. Such money or securities of investors should not form part of asset of intermediary and no authority shall attach or seize such assets of investors which are in custody or possession of such intermediary. Recommendation
The Group recommends that there should be a specific provision in the SEBI Act to the effect that the monies or securities of the clients should 34
be held in the form of a trust by intermediaries and no authority shall attach or seize such assets of investors which are in possession of the intermediary. For this purpose the provisions as proposed in the Securities Laws (Amendment) Bill, 2003 may be made.
SEBI during 1996-96 took several steps to promote and regulate The self regulatory organizations The measures taken by SEBI are discussed below. Association of Merchant Bankers of India (AMBI)
AMBI was granted recognition to set up professional standards for providing efficient services and establish standard practices in merchant banking and financial services. It was promoted for healthy business practice and to exercise overall supervision over its members in the matters of compliance with statutory rules and regulations pertaining to merchant banking and other activities. AMBI in consultation with SEBI is working towards improving disclosures standards in the offer document as well as meeting the statutory requirement in a systematic manner.
Association of Mutual Funds of India (AMFI)
The Association of Mutual Funds of India (AMFI) has been set up. SEBI undertakes regular consultations with members of AMFI on various issues affecting mutual funds. In February 1997, SEBI held a meeting with trustees of all mutual funds to discuss with them their responsibilities for prudential oversight of mutual funds in the light of SEBI (Mutual Funds) Regulations, 1996. Registrars Association of India (RAIN)
The Registrars Association of India (RAIN) a self regulatory organization for registrars to an issue and share transfer agents has been set up.
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5 Prohibiting fraudulent and unfair trade practices relating to securities market 6 Promoting investors education and training of intermediaries of securities market 7 Prohibiting insider trading in securities. 8 Regulating substantial acquisition of shares and takeover of companies 9 Performing such functions and exercising powers under the provisions of the Capital Issues (Control ) Act,1947 and Securities Control Act, 1956.
Capital Issues (Control) Act,1947
The main objective of this act were:To promote the expansion of private corporate sector, and growth of particular corporate enterprises having sound capital structure To distribute the Capital Structure in such a manner that there is no overcrowding in a particular period
Powers Of SEBI
To regulate all the issue activities and the merchant banking
To oversea the working of stock exchange in India
To act as a regulatory authority in regards to new issue activities of companies To oversea the operations of the Mutual Funds To file complaints in parts and to notify its regulations without prior approval of the government. To regulate issue of capital and transfer of securities
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To impose monetary penalties on various intermediaries and other participants for specified range of violation To issue directions and to call for documents from all financial intermediaries.
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Insurance Regulatory and Development Authority
The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto." In 2010, the Government of India ruled that the Unit Linked Insurance Plans (ULIPs) will be governed by IRDA, and not the market regulator Securities and Exchange Board of India. 38
Our Mission
To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.
Expectations
The law of India has following expectations from IRDA... 1. To protect the interest of and secure fair treatment to policyholders. 2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy. 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates. 4. To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard. 5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery. 6. To promote fairness, transparency and orderly conduct in financial markets dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players. 7. To take action where such standards are inadequate or ineffectively enforced. 8. To bring about optimum amount of self-regulation in day to day working of the industry consistent with the requirements of prudential regulation. Duties, Powers and Functions of IRDA Section 14 of IRDA Act, 1999 laysdown the duties,powers and functions of IRDA 39
1. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. 2. Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include, 1. issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; 2. protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; 3. specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; 4. specifying the code of conduct for surveyors and loss assessors; 5. promoting efficiency in the conduct of insurance business; 6. promoting and regulating professional organisations connected with the insurance and re-insurance business; 7. levying fees and other charges for carrying out the purposes of this Act; 8. calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business; 9. control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); 10. specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;
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11. regulating investment of funds by insurance companies; 12. regulating maintenance of margin of solvency; 13. adjudication of disputes between insurers and intermediaries or insurance intermediaries; 14. supervising the functioning of the Tariff Advisory Committee; 15. specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organisations referred to in clause (f); 16. specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and 17. exercising such other powers as may be prescribed from time to time, Advisory committee IRDA consists of a Chairman and some permanent as well as part time members. The regulations, however, are enacted under the guidance of a statutory advisory committee. The advisory committee consists of following individuals and ex-officio authorities:
Chairman: Hari Narayana is the current Chairman of IRDA. Full-time Members: Currently, they are Mr K K Srinivasan (Nonlife Member), Sri G Prabhakara (Life Member), Dr R Kannan(Member, Actuary) and Sri R.K. Nair (Member, F & I). There is provision for a panel of other members and part time members. IRDA formed a high powered Insurance Law Reforms Committee known as KPN Committee with important insurance advisors like Mr N Govardhan and Dr K C Mishra as its members. There were also a few non-advisory committee members like Mr Liaquat Khan and Mr T Viswanathan etc.
Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode. Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. Research is limited to opinion seeking through legacy channels. Market waits for revision of insurance act and establishment 41
meaningfully functioning regulatory organs devoid of excess delegation and subjective localization of development agencies. IRDA Journal is available as soft copy in its website.[2] Unlike other Indian administrative Regulatory Agencies IRDA is perceived as a silent regulator with activities confined to its local existence. Chairman selection process Government of India has circulated to broadbase IRDA chairman selection process. It is felt in the market that placing of retired civil servants as IRDA Chairman has served the purpose of administrative fiefdom of the regulator. Mostly, the regulator has become passive to market realities and most of the original public policy intentions have been systematically replaced by personal preferences. There seems to be no oversight of public policy erosions. Taking advantage of the completion of term of current incumbent, there seem to be an attempt to correct the future course but people do not perceive any outcome to result as the market does not seem to throw up candidates of the stature of Howard Davies for Indian market. But a right leadership is the solution to the requirement of this booming market.
Mission Statement Of IRDA
• To protect the interest of and secure fare treatment to policy holders. • To bring about speedy and orderly growth of the insurance industry
(Including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy. • To set, promote, monitor and enforce high standard of integrity,
financial soundness, fair dealing and competence of those it regulates. • To ensure that insurance customers receive precise, clear and correct
information about products and services and make them aware of their responsibilities and duties in this regard. • To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place affective grievance redressed machinery. • To promote fairness, transparency and orderly conduct in financial 42
market dealing with insurance and build a reliable management information system to enforce high standards of financial soundness amongst market players. F u n c ti o n s o f O m b u d s m a n
Brief note on the functioning of the offices of the Insurance Ombudsman
The institution of Insurance Ombudsman was created by a Government of India Notification dated 11th November, 1998 with the purpose of quick disposal of the grievances of the insured customers and to mitigate their problems involved in redressal of those grievances. This institution is of great importance and relevance for the protection of interests of policy holders and also in building their confidence in the system. The institution has helped to generate and sustain the faith and confidence amongst the consumers and insurers. Appointment of Insurance Ombudsman
The governing body of insurance council issues orders of appointment of the insurance Ombudsman on the recommendations of the committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central Government. Insurance council comprises of members of the Life Insurance council and general insurance council formed under Section 40 C of the Insurance Act, 1938. The governing body of insurance council consists of representatives of insurance companies. Eligibility
Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services. Terms of office
An insurance Ombudsman is appointed for a term of three years or till the incumbent attains the age of sixty five years, whichever is earlier. Re-appointment is not permitted.
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Territorial jurisdiction of Ombudsman
He governing body has appointed twelve Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction. The Ombudsman may hold sitting at various places within their area of jurisdiction in order to expedite disposal of complaints. The offices of the twelve insurance Ombudsmans are located at (1) Bhopal, (2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6) New Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai, (12) Hyderabad. The areas of jurisdiction of each Ombudsman has been mentioned in the list of Ombudsman. Office Management
The Ombudsman has a secretarial staff provided to him by the insurance council to assist him in discharging his duties. The total expenses on Ombudsman and his staff are incurred by the insurance companies who are members of the insurance council in such proportion as may be decided by the governing body. Removal from office
An Ombudsman may be removed from service for gross misconduct committed by him during his term of office. The governing body may appoint such person as it thinks fit to conduct enquiry in relation to misconduct of the Ombudsman. All enquiries on misconduct will be sent to Insurance Regulatory and Development Authority which may take a decision as to the proposed action to be taken against the Ombudsman. On recommendations of the IRDA, the Governing Body may terminate his services, in case he is found guilty. Power of Ombudsman
Insurance Ombudsman has two types of functions to perform (1) conciliation, (2) Award making. The insurance Ombudsman is empowered to receive and consider complaints in respect of personal lines of insurance from any person who has any grievance against an insurer. The complaint may relate to any grievance against the insurer i.e. (a) any partial or total repudiation of claims by the insurance 44
companies, (b) dispute with regard to premium paid or payable in terms of the policy, (c) dispute on the legal construction of the policy wordings in case such dispute relates to claims; (d) delay in settlement of claims and (e) non-issuance of any insurance document to customers after receipt of premium. Ombudsman's powers are restricted to insurance contracts of value not exceeding Rs. 20 lakhs. The insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months. Manner of lodging complaint
The complaint by an aggrieved person has to be in writing, and addressed to the insurance Ombudsman of the jurisdiction under which the office of the insurer falls. The complaint can also be lodged through the legal heirs of the insured. Before lodging a complaint: i) the complainant should have made a representation to the insurer named in the complaint and the insurer either should have rejected the complaint or the complainant have not received any reply within a period of one month after the concerned insurer has received his complaint or he is not satisfied with the reply of the insurer. ii) The complaint is not made later than one year after the insurer had replied. iii) The same complaint on the subject should not be pending with before any court, consumer forum or arbitrator. Recommendations of the Ombudsman
When a complaint is settled through the mediation of the Ombudsman, he shall make the recommendations which he thinks fair in the circumstances of the case. Such a recommendation shall be made not later than one month and copies of the same sent to complainant and the insurance company concerned. If the complainant accepts recommendations, he will send a communication in writing within 15 days of the date of receipt accepting the settlement.
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Award
The ombudsman shall pass an award within a period of three months from the receipt of the complaint. The awards are binding upon the insurance companies. If the policy holder is not satisfied with the award of the Ombudsman he can approach other venues like Consumer Forums and Courts of law for redressal of his grievances. As per the policy-holder's protection regulations, every insurer shall inform the policy holder along with the policy document in respect of the insurance Ombudsman in whose jurisdiction his office falls for the purpose of grievances redressal arising if any subsequently. Steady increase in number of complaints received by various Ombudsman shows that the policy-holders are reposing their confidence in the institution of Insurance Ombudsman.
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